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Resisting any moves toward tax hikes, the Bush administration
wants the IRS to step up enforcement, presumably to help offset the
ballooning budget deficit. That could mean more audits for
individuals and businesses, a daunting prospect for busy
entrepreneurs.

In February, the administration asked Congress for an extra $500
million for the IRS, raising the agency's enforcement budget to
$6.89 billion--a 7.8 percent increase over last year's budget.
Many observers, however, dismiss the increased funding as simple
saber rattling.

According to the Transactional Records Access Clearinghouse, a
research center at Syracuse University in Syracuse, New York,
despite several years of IRS claims of crackdowns, business audits
have steeply declined since 1996, from 5.6 audits per 1,000
business returns to 2 audits per 1,000 returns in fiscal year 2003.
Even businesses caught cheating don't face much punishment
beyond paying what they owe. TRAC statistics also show that the
number of penalties levied against corporations fell from 62 in
1999 to 12 in 2003, while civil fraud penalties dropped from 247 to
170 during the same time period.

These days, an audit isn't always a tense, face-to-face
encounter with an agent. A letter from the IRS saying you added
wrong also counts as an audit, at least in the eyes of the Treasury
Department.

While it appears that the chances of being audited remain
somewhat slim, you can further reduce your vulnerability by
avoiding tax shelters, which are the subject of increased scrutiny,
as well as deductions that are unusual for your industry. "One
thing I tell taxpayers is, 'Be consistent,'" says John
Maddox, a CPA with Maddox Ungar PLLC in Bingham Farms,
Michigan.

In the event you do face an audit, Maddox suggests that
restraint is your best ally, next to your accountant. Provide only
the information the IRS specifically asks for without going
overboard. The main thing is not to panic. "Just because the
IRS asks about something," Maddox says, "doesn't mean
you've done anything wrong."